EUROPEAN regulators have agreed to an £835 million deal to satisfy state aid rules following the bailout of Royal Bank of Scotland in 2008.

The package of measures promoting competition for banking services to smaller firms was put forward as an alternative after RBS ditched its previous bid to off-load 300 bank branches.

The Treasury said the latest plan for RBS, which includes a £425 million innovation fund and £350 million to incentivise small and medium-sized businesses to switch their accounts to eligible challenger banks, had been agreed in principle after a series of meetings with the EU Commission.

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The finance ministry said in a statement: "It will see RBS fund and deliver a package of measures to improve the UK business banking market and is designed to boost competition, helping small and medium-sized enterprises benefit from greater choice and offers on banking services."

City minister Stephen Barclay said: “The announcement today will help boost competition in the business banking market and marks another significant milestone in resolving a major legacy issue at RBS.

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“It builds on the recent settlement with the Federal Housing Finance Agency and together they show the progress being made to resolve RBS’s outstanding issues."

RBS chief executive Ross McEwan said: “We welcome the progress that [the Treasury] and the EC commissioner responsible for competition have made on agreeing an alternative package of remedies to increase competition in the [small business] marketplace.

“We await a formal decision on this proposal which would allow us to resolve our final State Aid divestment obligation.”